Lenders are bringing back 100% financing. Do you believe they can do it effectively? I have my doubts.
Irvine Home Address … 25 LAURELWOOD Irvine, CA 92620
Resale Home Price …… $899,000
Things just couldn't be the same
'Cause I'm as free as a bird now
And this bird you cannot change
Lynyrd Skynyrd — Freebird
Zero down mortgages were a big factor in the inflation of the housing bubble. The debate now is whether or not this form of financing is inherently bad or if that bird can change. This is one Phoenix that probably shouldn't rise from the ashes.
I wrote about the evils of 100% financing in The Great Housing Bubble:
100% Financing is a path to destruction
Once 100% financing became widely available, it was enthusiastically embraced by all parties: the lenders suddenly had a huge source of new customers to generate high fees, the realtors and builders now had plenty of new customers to buy more homes, and many potential buyers who did not have savings were able to enter the market. It seemed like a panacea; for two or three years, it was. There was a problem with 100% financing (which was masked by the rampant appreciation brought about by its introduction): high default rates. The more money people had to put in to the transaction, the less likely they were to default. It was that simple. The borrowers probably intended to repay the loan when they got it, however they did not feel much of a sense of responsibility to the loan when the going got tough. High loan-to-value loans had high default rates causing 100% financing to all but disappear, and it made other high LTV loans much more expensive, so much so as to render them practically useless. It was all part of the credit tightening cycle.
Besides stopping people from saving for downpayments, 100% financing harmed the market by depleting the buyer pool. In a normal real estate market, first-time buyers are saving their money waiting until they can make their first purchase. This usually results in a steady stream of first-time buyers that enter the market each year. When 100% financing eliminated the downpayment requirement, it also eliminated any need to wait. Those who ordinarily would have bought 2-5 years in the future were able to buy immediately. This emptied the queue. This type of financing appears periodically in the auto industry, especially in downturns when it is necessary to liquidate inventory. The term for this is “pulling demand forward,” because it reduces demand for new cars in the next few years. This might not have been a problem if 100% financing would have been made available to everyone forever; however, once downpayment requirements came back those who would have been saving were already homeowners, so there were few new buyers available, and any potential new buyers had to start over saving for the downpayment they thought would never be required. The situation was made worse because those late buyers who were “pulled forward” from the future buyer pool overpaid, and many lost their homes. This eliminated them from the buyer pool for several years due to poor credit and newly tightened credit underwriting standards. Thus, most who thought 100% financing was a dream come true found it to be a nightmare instead.
Mortgages as Options
An option contract provides the contract holder the option to force the contract writer to either buy or sell a particular asset at a given price. A typical option contract has an expiration date, and if the contract holder does not exercise his contract rights by a given date, he loses his contractual right to do so. An option giving the holder the right to buy is a “call” option, and the option giving the holder the right to sell is a “put” option. Writers of option contracts typically obtain a price premium for taking on the risk that prices may move against their position and the contract holder may exercise his right. The holder of an options contract willingly pays this premium to limit his losses to the premium paid if the investment does not go as planned. Most options expire worthless.
Mortgages took on the characteristics of options contracts in the Great Housing Bubble. Speculators utilized 100% financing and Option ARMs with low teaser rates to minimize the acquisition and holding costs of a particular property. The small amount they were paying was the “call premium” they were providing the lender. If prices went up, the speculator got to keep all the gains from appreciation, and if prices went down, the speculator could simply walk away from the mortgage and only lose the cost of the payments made, particularly when this debt was a non-recourse, purchase-money mortgage. Another method speculators and homeowners alike used was the “put” option refinance. [viii] Late in the bubble when prices were near their peak, many homeowners refinanced their properties and took out 100% of the equity in their homes. In the process, they were buying a “put” from the lender: if prices went down (which they did,) they already had the sales proceeds as if they had actually sold the property at the peak; if prices went up, they got to keep those profits as well. The only price for this “put” option was the small increase in monthly payments they had to make on the large sum they refinanced. In fact, on a relative cost basis, the premium charged to these speculators and homeowners was a small fraction of the premiums similar options cost on stocks. Of course, mortgages are not option contracts, and lenders did not view themselves as selling option premiums to profit from the premium payments; however, speculators certainly did view mortgages in this manner and treated them accordingly.
The "put" and "call" option features of mortgages during the bubble are the direct result of 100% financing. Speculators and homeowners have too little to lose to behave responsibly when 100% financing is available. Without increasing the cost to speculators through downpayments or a loan-to-value limit on refinances, speculators are going to utilize these mortgage products in ways they were not intended. There are many expensive lessons learned by lenders concerning 100% financing during the Great Housing Bubble.
With the problems of 100% financing, it is a legitimate worry that we may not want to let that genie out of the bottle.
New Program for Buyers, With No Money Down
By JOHN LELAND
Published: September 4, 2010
MILWAUKEE — When the housing bubble burst, one of the culprits, economists agreed, was exotic mortgages, including those that required little or no money down.
But on a recent evening, Matthew and Hannah Middlebrooke stood in their new $115,000 three-bedroom ranch house here, which Mr. Middlebrooke bought in June with just $1,000 down.
Because he also received a grant to cover closing costs and insurance, the check he wrote at the closing was for 67 cents.
“I thought I’d be stuck renting for years,” said Mr. Middlebrooke, 26, who earns $32,000 a year as a producer for a Christian television ministry.
The guy is only 26. Perhaps he could save money for a while like everyone else his age that wants to buy a house. Is a no money down house the new entitlement for twenty somethings?
As long as the borrowers are Christian ministers, I guess 100% financing is okay, right? Is this borrower more moral than the strategic defaulters who walked away from zero-down mortgages?
Although home foreclosures are again expected to top two million this year, Fannie Mae, the lending giant that required a government takeover, is creeping back into the market for mortgages with no down payment.
Mr. Middlebrooke’s mortgage came from a new program called Affordable Advantage, available to first-time home buyers in four states and created in conjunction with the states’ housing finance agencies. The program is expected to stay small, said Janis Smith, a spokeswoman for Fannie Mae.
Option ARMs were expected to stay small when they were rolled out too. A niche product with high appeal inevitably is made more widely available, and as these programs expand, buyers enter the market, prices go up, and the problems are masked by another housing bubble.
Some experts are concerned about the revival of such mortgages.
“Loans that have zero down payment perform worse than loans with down payments,” said Mathew Scire, a director of the Government Accountability Office’s financial markets and community investment team. “And loans with down payment assistance” — like Mr. Middlebrooke’s — “perform worse than those that do not.”
The evidence is clear: zero down loan programs have high default rates. Why should we pay the bad debts of the many who default to help the few that don't?
But the surprise is the support these loans have received, even from critics of exotic mortgages, who say low down payments themselves were not the problem, except when combined with other risk factors like adjustable rates or lax underwriting.
Moreover, they say, the housing market needs such nontraditional lending, as long as it is done prudently.
Again, the Option ARM is not a bad loan when given to the right people. The problem is that these loan programs are never contained to only the right people.
“This is subprime lending done right,” said John Taylor, president of the National Community Reinvestment Coalition, an umbrella group for 600 community organizations, and a staunch critic of the lending industry. “If they had done subprime this way in the first place, we wouldn’t have these problems.”
At Harvard’s Joint Center for Housing Studies, Eric Belsky, the director, said the loans might be the type of step necessary to restart the housing market, because down payment requirements are keeping first-time home buyers out.
I mentioned that problem above. This is a problem the housing market is going to have to get past. You can't give out 100% loans without having problems. The default rates will be high, and the programs will lose money. Do we really want to replace all the bad loan programs that inflated the bubble with government-run programs of the same ilk?
“If you look at where the market may get strength from, it may very well be from first-time buyers,” he said. “And a very significant constraint to first-time buyers is the wealth constraint.”
First-time buyers are really the only game in town. There is no move-up market while prices decline or stagnate.
The loans are the idea of state housing finance agencies, or H.F.A.’s, quasi-government entities created to help moderate-income people buy their first homes.
Throughout the foreclosure crisis, the state agencies continued to make loans with low down payments, often to borrowers with tarnished credit, with much lower default rates than comparable mortgages from commercial lenders or the Federal Housing Administration. The reason: the agencies did not offer adjustable rates, and they continued to document buyers’ income and assets, which many commercial lenders did not do. In 2009, the agencies’ sources of revenue dried up, and they had to curtail most lending.
Then they created Affordable Advantage. The loans are 30-year fixed mortgages, with mandatory homeownership counseling, available to people with credit scores of 680 and above (720 in Massachusetts). The buyers have to put in $1,000 and must live in the homes.
They keep out conventional investors with these requirements, but the specuvestor homeowner is strongly encouraged to buy a property with the government covering their downside risk. No risk loans are a bad idea.
All of these requirements ease the risk, said William Fitzpatrick, vice president and senior credit officer of Moody’s Investors Service. “These aren’t the loans that led us into the mortgage crisis,” he said.
So far Idaho, Massachusetts, Minnesota and Wisconsin are offering the loans. The Wisconsin Housing and Economic Development Authority has issued 500 loans since March, making it the first state to act. After six months, there are no delinquencies so far, said Kate Venne, a spokeswoman for the agency.
The agencies buy the loans from lenders, then sell them as securities to Fannie Mae. Because the government now owns 80 percent of Fannie Mae, taxpayers are on the hook if the loans go bad.
The US taxpayer is covering the losses of a new breed of speculator-homeowners.
The state agencies oversee the servicing of the loans and work with buyers if they fall behind — a mitigating factor, said Mr. Fitzpatrick of Moody’s.
“They have a mission to put people in homes and keep them in homes,” not to foreclose unless other options are exhausted, he said. The loans have interest rates about one-half of a percentage point above comparable loans that require down payments.
Ms. Smith, the spokeswoman for Fannie Mae, distinguished the program from loans of the boom years that “layered risk on top of risk.”
With the new loans, she said, “income is fully documented, monthly payments are fixed, credit score requirements are generally higher, and borrowers must be thoroughly counseled on the home-buying process and managing their mortgage debt.”
That probably does help.
For Porfiria Gonzalez and her son, Eric, the loan allowed them to move out of a rental house in a neighborhood with a high crime rate to a quiet street where her neighbors are retirees and police officers.
So this mortgage saved her and her son from the evils of drug dealers, gangs, and random violence. Pity the poor renters who have to continue to live in those crappy neighborhoods with pimps and prostitutes.
Ms. Gonzalez, 30, processes claims in the foreclosure unit at Wells Fargo Home Mortgage; she has seen the many ways a mortgage holder can fail.
On a recent afternoon in her three-bedroom ranch house here, Ms. Gonzalez said she did not see herself as repeating the risks of the homeowners whose claims she processed.
“I learned to stay away from ARM loans,” or adjustable rate mortgages, she said. “That’s the No. 1 thing. And always have some emergency money.”
When she first started shopping, she looked at houses priced around $140,000. But the homeownership counselor said she should keep the purchase price closer to $100,000.
A 40% reduction in price must have reduced the quality of the property she obtained a great deal. There is a tradeoff when deciding to purchase less.
“They explained to me that I don’t need a $1,200-a-month payment,” she said.
The counselor worked with her real estate agent and attended her closing. On May 28, Ms. Gonzalez bought her home for $90,500, with monthly payments of $834. After moving expenses, she has kept her savings close to $5,000 to shield her from emergencies.
“If I had to make a down payment, it would have wiped out my savings,” she said. “I would have started with nothing.”
Good thing she had some money to go shopping for furniture, right? How much of that emergency fund do you think she spent? If she didn't, I give her credit for great self-discipline. Most people would blow it on crap for the new house.
Now, she said, she is in a home she can afford in a neighborhood where her son can play in the yard. A neighbor brought her a metal pink flamingo with a welcome sign to place by her side door.
“My favorite part is the big backyard,” said Eric, 10. “And that’s pretty much it.”
“You don’t like it that it’s a quiet, safe neighborhood?” his mother asked.
“Yeah, I do.”
“He didn’t go out much with kids in the old neighborhood,” she said.
“Because they were bad kids,” he said.
Ms. Gonzalez said that owning a house was much more work than renting, and that when the basement flooded during a heavy rain, her heart sank.
“But I look at it as an investment,” she said, adding that a similar house in the neighborhood was on the market for $120,000.
That's a great attitude for zero-down buyers to have. Not. What would she be saying if comps were selling for $85,000?
Prentiss Cox, a professor at the University of Minnesota Law School who has been deeply critical of the mortgage industry, said the program met an important need and highlighted the track record of state housing agencies, which never engaged in exotic loans.
“It’s not a story people want to hear, because it won’t bring back the big profits,” Mr. Cox said. “The H.F.A.’s have shown how the problems of the last 10 years were about having sound and prudent regulation of lending, not just whether the loans were prime or subprime.”
He added, “One of the great and unsung tragedies of the whole crisis was the end of the subprime market.”
What? One of the great virtues of the crash has been the elimination of the subprime market. Why is it a good idea to loan money to people who have proven they cannot save money or make a consistent payment? Subprime borrowers are not stuck in poverty. Subprime borrowers suffer from the consequences of their own life's choices. Unless they prove they can make different choices, they cannot sustain home ownership, and loaning them money is only going to result in losses to the lender.
What do you think? Can no money down mortgages be underwritten prudently?
It's all an illusion
Sometimes I feel a bit sorry for the poor Ponzis in Irvine. There are thousands of Ponzis in communities all over California, but only the ones in Irvine have me looking through their dirty laundry. The illusion in Irvine is that a mob of high-income buyers live the good life. The reality is that many of them are pretending Ponzis that only made it by spending their home appreciation as soon as it appeared. Today's featured property is a Ponzi short sale.
- The owners paid $750,000 on 8/22/2003. They used a $600,000 first mortgage, a $74,900 second mortgage, and a $75,100 down payment.
-
On 8/5/2004 they refinanced with a $700,000 first mortgage.
- On 4/26/2005 they obtained a stand-alone second for $44,250.
- On 11/9/2005 they refinanced with a $738,000 Option ARM and obtained a $220,000 HELOC.
- On 9/6/2007 they got another Option ARM for $837,615 and a $170,385 HELOC.
- Total property debt is $1,008,000.
- Total mortgage equity withdrawal is $333,100.
- Total squatting time is 10 months so far.
Foreclosure Record
Recording Date: 06/15/2010
Document Type: Notice of Sale
Foreclosure Record
Recording Date: 02/10/2010
Document Type: Notice of Default
Look at what these people spent, and look at the property they are going to lose because of that behavior. It's sad really.
Irvine Home Address … 25 LAURELWOOD Irvine, CA 92620 
Resale Home Price … $899,000
Home Purchase Price … $750,000
Home Purchase Date …. 8/22/2003
Net Gain (Loss) ………. $95,060
Percent Change ………. 12.7%
Annual Appreciation … 2.3%
Cost of Ownership
————————————————-
$899,000 ………. Asking Price
$179,800 ………. 20% Down Conventional
4.36% …………… Mortgage Interest Rate
$719,200 ………. 30-Year Mortgage
$172,824 ………. Income Requirement
$3,584 ………. Monthly Mortgage Payment
$779 ………. Property Tax
$167 ………. Special Taxes and Levies (Mello Roos)
$75 ………. Homeowners Insurance
$170 ………. Homeowners Association Fees
============================================
$4,775 ………. Monthly Cash Outlays
-$848 ………. Tax Savings (% of Interest and Property Tax)
-$971 ………. Equity Hidden in Payment
$286 ………. Lost Income to Down Payment (net of taxes)
$112 ………. Maintenance and Replacement Reserves
============================================
$3,354 ………. Monthly Cost of Ownership
Cash Acquisition Demands
——————————————————————————
$8,990 ………. Furnishing and Move In @1%
$8,990 ………. Closing Costs @1%
$7,192 ………… Interest Points @1% of Loan
$179,800 ………. Down Payment
============================================
$204,972 ………. Total Cash Costs
$51,400 ………… Emergency Cash Reserves
============================================
$256,372 ………. Total Savings Needed
Property Details for 25 LAURELWOOD Irvine, CA 92620
——————————————————————————
Beds: 5
Baths: 3 full 1 part baths
Home size: 2,588 sq ft
($347 / sq ft)
Lot Size: 4,510 sq ft
Year Built: 1997
Days on Market: 82
Listing Updated: 40355
MLS Number: S622100
Property Type: Single Family, Residential
Community: Northwood
Tract: Oakh
——————————————————————————
According to the listing agent, this listing may be a pre-foreclosure or short sale.
This property is in backup or contingent offer status.
Guard Gated Northwood Pointe. Desirable Oakhurst plan with main floor bedroom and bathroom. Beautiful entry with custom double door and tasteful hardscape. Formal living and dining with vaulted ceilings. Light and bright kitchen with granite counters and breakfast nook opens to family room with fireplace and built in entertainment center. Nice size yard with built in bbq. Walk to Canyonview Elementary and Northwood High School.
I do not favor 100% loans …. Perhaps one reason why the GSEs do it is to keep the cash flow coming and to do the extreme thing to keep the real estate market up; but this only works in the short term; its like an alcoholic getting some booze to stop the jitters.
I do want to take the opportunity to advise you that an epic change occurred September 22, 2010 which I reference in my linked Seeking Alpha article: A bear market has commenced in stocks; this as traders took profit from the recent rally by selling a broad spectrum of rally leaders.
Banks, KBE, fell 1.8%. The chart of Junk Bonds, JNK, reflecting the fall of investment liquidity, is the investment chart of the century. Peak Credit occurred Monday September 20, 2010 with the value of Junk Bonds, JNK, peaking out at 39.71. The Global Credit Bubble has been pricked. The world has gone over the tipping point; it has passed from prosperity to debt servitude.
The Bank of Japan and Kan have declared war on the currency traders to stop the rise of the Yen: “Japan and the currency traders have scorched the investment skies” … “Welcome to the investment desert of the real” … “We have a new investment matrix” … “We ain’t in Kansas no more” … Kan’s selling of Yen on September 15, 2010, has started global competitive currency devaluation. All currencies will now be falling into the pit of financial abandon together, albeit at different rates.
With bank capital being eroded by the bear market, and by the banks Excess Reserves, being deflated by falling US government bond, TLT, value, banks will turn to foreclosing and then renting properties.
And one day, US Treasuries will fail to auction and the GSEs will quit underwriting mortgages, and this too will cause banks to turn to foreclosing and renting properties.
Unrelated, but nearing the age of 40, I finally got religion about money, started aggressively paying down my $74K in debt and, four years ago today, Sept 23, 2006, I was debt free. By cleverly going through my own housing crisis by buying in 1989, I absolutely refused to enter the housing market in the recent bubble, because all I could think about was how my crappy condo was a millstone around my neck for nine long years.
I started going into debt at 16 with student loans, though STUDENT LOANS ARE A GOOD THING, and continued to be in debt until I was 44. I am still astonished at how much better the world looks. I’ve always had a good, if stressful, job, but when I was paying $600/month in interest alone, I could not look at my job with any other perspective than that of a total slave — if I had to work six and seven days a week, I did so, because I would do absolutely nothing to endanger my job. I still have my job, and it’s still stressful, but I am staying by choice because the job is interesting again.
Now my very hard-earned non-401K savings have recently edged into six digits, dollar by dollar every two weeks. I don’t often go around patting myself on the back, but: yay for me!
GOOD for you. Ypu SHOULD be patting yourself on the back!!!
You sound like you’ve been listening to Dave Ramsey.
I’m probably completely atypical of Ramsey’s audience – I don’t live in middle-America; I’m not a big-church-going Christian; and I’m not stuggling with income. However, there’s no better thing for me to listen to when at the gym than Ramsey’s podcasts.
The best thing somebody can do for their personal well-being is to save up $100,000 in a savings account or CD.
It really does change your outlook on life when you have a substantial cushion.
And it’s fun to troll the bank rate web sites looking for the highest and safest interest rates. (well, before the Fed started giving away money to the banksters.)
(In Japan, it’s considered to be deeply shameful to not have $100k in personal savings.)
Is that $100k in USD or Yen?
I doubt it’s the latter 🙂
“Ms. Gonzalez bought her home for $90,500, with monthly payments of $834”
WTF? Did she get loan shark financing? a 15 year mortgage of $90,500 calcs out at 7.5% interest rate… but the 30 year is a whopping 10.7% rate, over double the going rate… i guess the silver lining is that the money is being risk priced…
There is most likely an escrow account in that loan paying taxes and insurance. That would bring the interest rate down significantly. But yes, it would seem they are at least pricing in some risk.
As to today’s property – The house was on the market for only a few days. It was taken for 925K (26K more than the asking price). It is still on the market for back-up offers but they don’t really talk to you. And there is no reason to offer more any way. It is a short-sale, and they are waiting for the approval of the second. After realtors’ fees, I guess nothing is left for the second, so why should they approve?
It’s likely PITI+HOA if any.
I’m not against zero down loans, providing the underwriting guidelines are solid. The 2003-2006 problems with zero down loans is that they rarely had PMI. These were the infamous piggyback loans (80/20’s) which left the Agencies fully exposed to loss. These new loans will have significant PMI expenses relative to other loans.
Just because FNMA offers zero down loans does not mean lenders will push them. Most of the majors won’t get involved in these loans and if they do, the approval process will likely involve the entire fist, not just a couple fingers.
(a “Fletch”-ism)
My .02c
Soylent Green Is People.
This is a decent house. But, the pictures of each room have so much going on. Too full of furniture and whatevers. Is that a beauty shop chair in the bathroom?
We had a zero-down loan on our first home. While they were readily available for everyone, this was a product for MDs. We got a 15yr, which is what I would want to see in 100% financing products. I would give them to people short on savings but strong on cashflow. They should be structured to have the highest payments up-front, and then at some point have the payments go down. This serves two purposes: qualifying someone based on the higher payment yields a lower general DTI (ours was originally 13%), and the extra payment goes towards paying in equity.
100% financing should never go to non-owner occupied homes and other lenders should report to the original lender if someone gets another loan with an existing 100% loan out – to prevent the ‘investor’ from living in a home for a short period and then turning it into a rental/specuvestment.
“…Subprime borrowers suffer from the consequences of their own life’s choices…”
I’m all for personal responsibility, but the position (family, neighborhood, culture) in life in which you’re born has a very large effect on your initial direction; and I’m a big believer in the power of feedback loops (positive and negative) – the theory that decisions/actions tend to lead to similar choices and results and these compound and feed on each other, in either a positive or negative direction.
“…Can no money down mortgages be underwritten prudently? …”
Yes. A high LTV is just one risk factor of many. High LTV loans can be made very prudently so long as the underwriting is conservative/traditional otherwise.
e.g. If the loan is a:
30-year fixed loan,
< 28% front-end DTI, < 33% back-end DTI, & 6+ months of reserves Then going with 100% LTV does not increase the risk on this loan very much, AND you can charge for the additional risk in MI premiums and/or a higher rate.
No-down loans don’t need to be a disaster, and for many decades, VA and FHA backed no-down or 3% down loans for QUALIFIED borrowers with good results. Many lower-middle-income people were able to buy and attain housing security and a little bit of equity thereby.
What has caused this disaster is the total discarding of lending standards altogether. For one thing, the DTI ratios became absurd. I don’t care how much you put down or how good your FICO is or how solid and verifiable your income documentation- there is NO WAY anyone can afford to borrow 4,5, 5X his income or more. In the early 80s, when we saw the first ARM loans, lenders went to the 4X DTI standard, where it had previously been 2.5X your income. There was an immediate surge in defaults. I penciled through the numbers for my own income, and could easily see that I would be squeezed to death on a loan 4X my income, even at relatively low interest rates. It leaves no room for savings or other debts that many people have, such as multiple car loans and credit cards. It leaves very little room for any discretionary spending.
However, the worst damage was done when sanity was abandoned altogether with I.O., NINJA, No-doc, and pay option arm loans. These are the loans that made it possible for somebody with a combined 2-income household income of $60K to buy a $900K house in a Chicago suburb. DTIs of 7, 8, or more became very common. Now, anyone can see that this only “works” with a pay option ARM or IO or some other piece of insanity that allows the borrower to enter the deal with an absurdly low payment relative to the amount borrowed, with the understanding that the house will automatically appreciate enough by the time the loan resets to make the inevitable balloon payment for all that deferred interest and principle. Of course, this would never happen because the value of houses was determined by whoever was willing to borrow the most irresponsible money. There was never any chance these people could pay back these loans.
Add to this the incredible HELOC abuse, and we had the perfect setup for a complete financial collapse. It could not have happened any other way.
Eliminate ARM loans, IO loans, and other kinds of “trick” mortgages, write loans only for 2.5X income, or even less if the borrower has other debt; verify incomes and credit histories- in other words, underwrite the loan properly- and we can offer no-down loans to select borrowers as we did in the 50s, 60s, and 70s. But there is no way we can have a decent financial system with the incredible abuses and trickbag loans of the past 15 years.
You’re absolutely right.
I like to use the 2.5X income as a rule-of-thumb, rather than an underwriting standard. Using the 28%/33% DTI ratios accounts for all debts and interest rates.
The 100% financing is a significant increase in risk layering. Banks should really use a very conservative DTI with 100% financing. 100% financing and a high DTI screams “borrower will be unable and/or unwilling to save money and will need to borrow more when anything breaks in the house”.
FHA is supposed to price this risk in their insurance premiums. I’m surprised banks are moving back to 100% financing while FHA is trying to move from 3% to 5% down due to excessive defaults.
We bought our house at 3.4x our income. We’re doing quite easily while maxing out my 401k. My next move is to get my wife to quit her job to take care of the home 🙂
That is an *excellent* idea, because then if you get divorced, you will feel pain like you have never felt. Marriage is the worst financial contract you could ever sign, and when the love is gone, all that’s left is assets.
GO FOR IT!!!
True. It’ll bite you two ways. The first is, after 10 years of marriage, you’ll be required to pay the unemployed ex spousal support for a period or time. And second, because the ex will earn much less after the divorce having spent years out of the workforce, the ex will contribute less to the care of your children – the balance of which you’ll get to pick-up in child support.
Marriage is only the worst financial contract though, if you choose poorly. Choose your spouse wisely. Do not marry a deadbeat, no matter how handsome or pretty…
My issue with zero down loans is that the buyer is always going to be underwater for the first several years of a loan if they have to sell. They are going to be out 5 or 6% just for the sales commission, and if the market isn’t great, they’ll be paying 3 or 4% in closing costs and incentives to the next buyer.
And if they default, by the time the bank forecloses on them, it will cost the bank 10 or 15% in lost interest and disposal costs.
If the buyer can’t come up with 3.5% down, what makes anyone think that they can come up with 8-10% cash to bring to the table to get out of a house after a couple years? And if they have no skin in the game, why would they even try?
Zero down is a horrible idea, but I expect the program will be significantly expanded because it is consistent with other ill-advised government programs as follows:
– Is short-term focused w/o regard to long-term consequences.
– Attempts to solve a government and individual problem of too much debt, too much spending and too little savings with more debt, more spending and less savings.
– Involves immediate gratification as opposed to working hard, saving and prudent spending.
– Moral hazards of teaching people that saving money isn’t necessary, 100% leverage is not only acceptable but is the solution, living on the edge financially is encouraged, personal responsibility isn’t important, all risk should be absorbed by the government, etc. – i.e. teaching people all the wrong lessons.
– The government (ie taxpayers) assumes 100% of the risk and receives 0% of the reward.
– Total disregard of the use of taxpayer money.
– Wastes more money by artificially attempting to prop up home prices.
– Assumes that the home ownership is better than renting even if it involves living on the financial edge which is completely wrong.
– Encourages entitlement thinking.
– This proposal merely adds to the house of cards instead of fixing it.
Too much leverage was a significant factor in the great depression. Stocks could be purchased with 10% down which contributed to bubble prices in stocks in the roaring 20s. The bubble wasn’t completely deflated until the Dow lost 90% of its value as selling causes more selling in over leveraged markets. 10% down allowed a lot of people to participate in the stock market only to wipe them and others out. 10% down was a catastrophe. And now we have witnessed how over leverage contributed greatly to the housing bubble and makes any solution exceedingly difficult and expensive. 50% down is now required (although can be circumvented) for stock purchases which is an obvious improvement, although even 50% down causes over leveraged selling (e.g. margin calls) that can feed on itself.
The solution to over leveraged markets is not more leverage. The 3% down government programs aren’t much better. Such programs just add to systemic risk and will inevitably lead to disaster at some point when prices fall precipitously and selling begets selling, wiping out the people who thought were supposedly being helped as well as others. If you like 3% down government programs than read the above bullet points again because they largely apply.
The only problem is that you’re leaping from the effect (housing price crash) to a single cause (leverage). Do you believe the sole reason for the bubble and subsequent and continuing crash is leverage? If not, then what percentage do you attribute to leverage?
Over leverage was not the sole reason for the bubble and crash, but it obviously contributed to the bubble, has/will make the crash deeper and more painful and makes any solution more difficult, not to mention other problems associated with over leverage. Further, legalized leverage of 33-1 results in a catastrophe waiting to happen.
Leverage was THE driving factor in the creation of the bubble, and the necessary de-leveraging, and monstrous stack of completely unrepayable debt, has greatly amplified the economic fallout.
It is most likely we would have experienced a fairly deep recession after the Tech Wreck of 2001-2 no matter what, for our economy was really not growing at all, and had experienced anemic growth through the 90s, not perking up until the Dot.com craze of the 90s. Enough on that- we all know about the hundreds of dot.coms that were empty shells with no real product to offer but that were sitting atop hundreds of millions of dollars raised through public offerings palmed off on a credulous, hype-crazed public for massive premiums that in no way reflected the real business prospects of these companies.
When that bubble predictably burst, we were confronted with a sluggish, essentially unproductive economy that had shredded its manufacturing infrastructure. This happened over a period of 30 years of deficit spending and public bailouts of our S&Ls;, a major automaker, and every third-world government that had defaulted on its debt to the IMF.
Worse, we had gone from being the world’s major oil producer before 1970, when our domestic production peaked, to being dependent on oil imports. When global supplies started to tighten in the early 2000s (and it was known this was coming in the 90s), the effect on our economy was depressing. We really didn’t have many ways to make a living next. So, instead of manufacturing goods, we made a quite deliberate decision to manufacture asset inflation and debt. This really was a central policy decision of the Bush administration, and Obama is following in his predecessor’s footsteps exactly.
The amount of leverage in the system goes way beyond the mortgages on laughably overpriced houses given to unqualified buyers. Figure that for every $500K mortgage, there is about $5,000,000 worth of claims against it, thanks to the debt derivatives pyramided one upon another, and the incredible cross-collatoralization resulting.
All the decisions regarding monetary and economic policy, all the bailouts, all the fantastic pyramiding of debt over the past 40 years has been taking us step by step to this point, and it will take 30 years to reverse the damage done if we do everything right starting today. Which we won’t. I sometimes feel we are in for not 20 lost years, but more like 50.
I feel very bad for young people coming of age now, and the generation 10 years ahead of them. They will be stuck with the consequences of about 80 years of absolutely evil economic and fiscal policy.
The pennies down after govt rebates on a HOUSE loan is asking from trouble again. The redeming aspect of the minister’s loan is that the DTI is only 3x and payment is likely about $952/month or $11433 per year which would include RE taxes ($1500), interest (5%), PMI (1.5%) and insurance ($800) with in income of $32,000.
Not much different from the 3.5% FHA loan less the tax rebates. The banks don’t care if they make a new GSE loan that defaults. They will have been paid, will get extra for the FC and are no longer liable if the loan was properly documented and rated. The Taxpayers wil pick up the tab — Party on!
A co-worker was approved for a regular loan. Found out about the 3.5% FHA loan and closed within a month. Who says they dried up. There talk about making 0% down as standard GSE and 0% on Jumbo’s for new MD and JD. Some animals are created more equal than others.
“The illusion in Irvine is that a mob of high-income buyers live the good life. The reality is that many of them are pretending Ponzis that only made it by spending their home appreciation as soon as it appeared”
The reality seems a heck of a lot more like this:
This house sold for $750K in 2003.
Now it’s under contract to sell around $900K to someone with income and assets that support that price.
Sorry but that’s the cold truth.
> He added, “One of the great and unsung tragedies of the whole crisis was the end of the subprime market.” – Prentiss Cox, a professor at the University of Minnesota Law School
ROFLMAO
WTF? Did a lender donate a building to the law school?